Silver End Game?

by Stephen Kovaka, CPA | September 4, 2008

WHAT WE NOW KNOW

Taking a very long view, it is clear that Government/ Banking cartels have colluded for well over a century to exclude gold and silver from monetary systems worldwide. One country after another demonetized silver in favor of gold, and then gold in favor of fiat or debt money. At the same time national stocks of silver around the world have been dissipated, sold at giveaway prices as part of a long term plan to hold down the price of silver and gold, and preventing any possibility of an easy return to circulating silver coinage. The CRIMEX silver futures market has proven to be a de facto price setting mechanism masquerading as a free market, also aimed at holding down the price of silver. And all this, just to put some lipstick on the debt money pig. With this as background, let's take a look at recent developments in the silver markets.

In spite of the cartel’s strenuous efforts, silver and gold have maintained one important competitive advantage over debt money: they have intrinsic value because they have to be mined at considerable cost. They represent a way of escape from inflationary wealth redistribution, as even Alan Greenspan has admitted. But this is also a major reason why they disappeared from circulation: few would pay with real wealth when debt money is accepted and mandated in its place. The current bull market in precious metals has highlighted the possibility of investing in gold and silver as alternatives to financial instruments. The cartel cannot allow this trend to gain too much momentum.

The cartel's reaction has been two fold: work to cap any price increases, while creating high volatility, especially to the down side. This pits two important properties of money against one another: store of value and stability of value. Those who invested in gold and silver in recent years bought assets that have appreciated against debt money over the past seven years, but at the cost of increased risk and decreased flexibility. One might have to wait a year or more to be certain of profiting from a precious metals investment, and the future value of the investment is made much more uncertain. It becomes necessary to wait for and identify good buying and selling points. Sell too soon and you might even end up with a loss. In short, the repeated sudden plunges in value deter many from buying silver and gold, who might otherwise be attracted by the recent returns.

In spite of this however, prices have risen. Silver and gold have proven to be superior investments in recent years when compared with stocks and bond. But the recent retail shortage of silver has brought some new possibilities into view. Since we know that we are working against powerful entities whose fixed purpose has been to eliminate precious metals from the monetary and investment scene, we have to consider the possibility that the anomalous retail silver shortage is not an unforeseen side effect, but a deliberate policy. What could the purpose of such a policy be?

DEVIL’S ADVOCATE

What if the intent of the retail product shortage is to cap the silver bull market by simply removing the product? If there is nothing to buy, how are new buyers going to enter the market? How are retail dealers going to earn a living? Without a healthy network of retail dealers, how can there be a market for silver investors to sell into? The end result would be to prevent any further distribution of remaining centrally controlled silver stockpiles into the hands of growing numbers of retail investors. Physical ownership of silver would then be limited to the few wealthy investors who could afford to deal in 1,000 oz. bars. And going back to our premises above, centralizing of gold and silver in the hands of cartel members has long been a fixed purpose of their policy. They simply do not want silver and gold widely dispersed into retail hands, because this disperses power back to the people.

How is it that after months of reported shortages, new supplies of retail products are not forthcoming? Some have said that it is merely a manufacturing problem, that increased production levels take time. But really, how much time does it take to melt down 1,000 ounce bars and recast them into 100 oz. bars, or stamp them into coin blanks? Free markets are remarkably adept at detecting and meeting demand, provided that prices are allowed to rise. Are the existing production facilities working overtime to supply the demand? Are 1,000 oz. bars being melted to make retail product? Is newly refined silver being cast into 10 and 100 oz. bars to meet retail demand? The answer to these questions is clearly NO. Instead, we have seen recent reports that retail silver dealers and manufacturing operations are actually closing down. In my view, when a Perth Mint employee reports that “wholesale bars are available but only in wholesale quantities, i.e. 20 TONS of silver or 1 TON of gold”, that is telling me that retail customers, even large ones, are being locked out in the cold. “Yes, we have beef for sale, but only by the herd.”

One answer might be that nobody wants to sell silver at the current low prices. This has a certain logic, in that few current owners of retail form silver want to sell at $13/oz. Of course not! These are the very people who want to buy more silver at bargain prices. But industrial users are buying silver every day in bulk, at whatever price the CRIMEX determines. So it would be only to retail buyers that nobody wants to sell silver at these low prices. And remember, supplies have been drying up all year, even when prices touched $21/oz. There is no evidence that any serious efforts have been made to increase supplies of retail silver.

Surely what we are seeing are de facto price controls an unacknowledged allocation of a scarce resource to larger, more favored (wholesale)customers. Because sustained high prices are a requirement for increasing supplies, this shortage is unlikely to be corrected soon, certainly not while prices are held below the cost of primary production by the permanent short interest at the CRIMEX.

Commentators have often forecast the day when a massive flight from financial investments and debt money into silver and gold would drive prices up to stratospheric levels. The shortage of retail products may represent the cartel's attempt at solving that “problem”: you simply make the product unavailable to the large majority of investors. Then the retail market for silver withers away, and retail investors have no means to bid up the price of real silver. A market can become so negligibly small that it no longer has any effect on price or investment allocations.

In its place, we find such schemes as the exchange traded funds SLV and GLD. These might be thought of as CRIMEX v2.0, a more retail oriented product that retains the essential feature of paper silver, namely the ability to create additional supplies from nothing, as needed. This is simply fractional reserve banking dressed up as an ETF. It also keeps the existing 1,000 oz. silver bars right there in the bullion bank vaults where they belong, thereby enabling the bullion banks and metals dealers to continue controlling the price.

Silver's fundamentals are extraordinary, but a primary bull market needs more than fundamentals. It also needs a steady supply of new buyers who are attracted by rising prices. It needs promotion to communicate the opportunity to these new buyers. And it needs a reliable supply of the product. I am reminded of the federal government's unemployment reports, in which those who remain unemployed too long are labeled “discouraged workers” and conveniently removed from the statistics. If the current shortage of retail products continues, will we begin to see discouraged silver investors giving up on investing in silver, or becoming buyers of paper silver instead?

A RAY OF HOPE?

It is not wise for a person to take counsel of his fears, and I must admit that this view risks attributing too much power to what Ted Butler has called “the silver managers”. Nor am I saying that my speculation is true, only that it is logical. Personally, I would be more than happy to see it demonstrated to be false. Let the free market supply a cornucopia of silver in 100 oz. bars and coins! But given that the silver managers have clearly demonstrated their power by dropping the price of silver more than 25% in the first half of August, in the face of visible shortages, we have to consider the possibility that the shortage of retail silver is intentional. Perhaps it is only a part of window dressing the American economy before the November election, and will soon be remedied after the incumbents have all been reelected.

It is an article of faith that market forces always triumph over intervention, manipulation and price fixing. To be realistic, we would have to add “in the long run” to that statement, and the long run can easily exceed the usual investment time frame. Concentrated political power is capable of simply ignoring market forces for long periods of time, as witness Soviet Russia in the 20th century. I think that the silver managers would certainly like to dry up the retail market, but only time will tell whether they are able to do it.

Looking on the bright side, I do see GoldMoney and Bullion Vault (I have no connection whatever with either business) as ways that retail investors can still buy small amounts of gold and silver at the current bargain prices and own them in allocated accounts. This avoids the shortage of silver and gold in retail form. In this way, the demand of small retail buyers is transmitted into the otherwise inaccessible “big bar” wholesale market, and can help to move prices higher whether or not silver is produced and sold in coin or small bar form. When supplies of retail product come back on the market, accounts at either business could easily be sold and the funds used to buy the smaller coins and bars if desired. In my view, these businesses are far superior to the SLV or GLD exchange traded funds, because the represent a demand for real gold and silver that cannot be readily shorted.

Nevertheless, I still maintain that concentrated hoards of gold and silver in the hands of political power are a serious problem for freedom that will only be solved when that metal is once again placed into circulation with the general public. When you buy retail size silver and take it home, you are diminishing the stockpiles that the silver managers use to control the price. Maybe they are beginning to worry about that.

Contact Information

Stephen Kovaka, CPA | Corydon, IN USA | Email